assessment of the kosovo innovation system

7/22/2019 Assessment of the Kosovo Innovation System

1/113

This project is funded by

the European Union

PRIVATE SECTOR DEVELOPMENT

Project Insights

Assessment of the

Kosovo* Innovation

System


2/113

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where governments work together to address

the economic, social and environmental challenges of globalisation. The

OECD is also at the forefront of efforts to understand and to help governments

respond to new developments and concerns, such as corporate governance,

the information economy and the challenges of an ageing population. The

Organisation provides a setting where governments can compare policy

experiences, seek answers to common problems, identify good practice andwork to co-ordinate domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, Chile,

the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,

Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the

Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,

Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the

United States. The European Union takes part in the work of the OECD.

www.oecd.org

OECD INVESTMENT COMPACT FOR SOUTH EAST EUROPE

Launched in 2000, the OECD Investment Compact for South East Europe

supports governments of the region to improve their investment climate and

foster private sector development. Its members include Albania, Bosnia and

Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia,

the Republic of Moldova, Montenegro, Romania and Serbia, with Kosovo* as anobserver.

Using the OECD methods of policy dialogue and peer learning, the Compact

brings together representatives from South East Europe (SEE) governments to

exchange good practices and to use OECD tools and instruments in a way that

is tailored to the needs of the SEE economies and helps them move closer to

internationally recognised standards. www.investmentcompact.org

* This designation is without predjudice to positions on status, and is in line with UNSCR 1244 and the

ICJ Opinion on the Kosovo declaration of independence. Hereafter referred to as Kosovo.


3/113

1

RCI Project Insights

Assessment of the Kosovo*Innovation System

March 2013

*This designation is without prejudice to positions on status, and is in line with UNSCR 1244 andthe ICJ Opinion on the Kosovo declaration of independence.


4/113

2

This document and any map included herein are without prejudice to the status of or sovereigntyover any territory, to the delimitation of international frontiers and boundaries and to the name of anyterritory, city or area.

This document has been produced with the financial assistance of the European Union. The viewsexpressed herein can in no way be taken to reflect the official opinion of the European Union.


5/113

3

FOREWORD

Between 2000 and 2008 the Western Balkan economies experienced rapid growth, modestinflation, and increased macro-economic stability. The onset of the global economic crisis, however,saw a sharp drop in external trade and industrial production across the region. The crisis underscoredthe fact that buoyant growth prior to 2008 relied to a large extent on external financial flows

particularly FDI flows and international capital transfers that offset large and unsustainable trade andcurrent account deficits.

The economic crisis is forcing governments in the region to make policy choices that will haveimplications for their long-term competitiveness. To assist Western Balkan governments in the designand implementation of those policies, the OECD Investment Compact for South East Europe (OECDIC) implemented a three year EU-financed project called the Regional Competitiveness Initiative(RCI). The RCIs goal is to help governments in the region with the design of sustainable economic

policies to support innovation and human capital development. Between 2010 and 2013, the RCI ledpilot projects in seven Western Balkan economies: Albania, Bosnia and Herzegovina, Croatia, TheFormer Yugoslav Republic of Macedonia, Kosovo, Montenegro, and Serbia.

Beginning in 2011, each Western Balkan economy had the opportunity to implement a capacitybuilding pilot project with the OECD IC. As its RCI pilot project, Kosovo requested assistance withthe development of an innovation strategy. The decision to seek OECD support on this topic came as aresult of a roundtable meeting on 25 October 2011 in Pristina between members of the businesscommunity, researchers, public officials and the OECD IC.


6/113

4

ACKNOWLEDGEMENTS

Preparation of this study has involved many experts, institutions and government officials. AlanPaic, Head of the OECD Investment Compact for South East Europe (OECD IC), has had overallmanagement responsibility. The report was authored by Anita Richter and Almedina Music from theOECD IC with contributions from Domagoj Racic. Additional support and research assistance was

provided by Givette Perez and Elena Hoyos Ramirez. The analysis and recommendations presented inthis study were reviewed and enriched by comments from Alan Paic, Milan Konopek, Ricardo Pintoand Slavo Radosevic. The final report was prepared by Vanessa Valle, Liz Zachary, and SallyHinchcliffe.

Thanks are due to local counterparts, in particular Murteza Osdautaj and Bujar Gallopeni(Ministry of Education, Science and Technology) as well as other partners in government, academiaand in the private sector, who supported the implementation of this project and dedicated time to meetwith the project team during the OECD missions. We are thankful to Vjollca Cavolli, Granit Berisha,and Xhemajl Syla for assisting with the organisation and facilitation of meetings in Kosovo.

Without the financial support of the European Union this work would not have been possible andits contribution is also gratefully acknowledged.


7/113

5

TABLE OF CONTENTS

ABBREVIATIONS ....................................................................................................................... 8EXECUTIVE SUMMARY ......................................................................................................... 11CHAPTER 1 ECONOMIC PERFORMANCE AND FRAMEWORK CONDITIONS ............ 15

1.1 Economic environment ...................................................................................................... 161.2 Framework conditions for innovation ................................................................................ 24

CHAPTER 2 INSTITUTIONAL FRAMEWORK FOR INNOVATION ................................. 292.1 Institutional setup ............................................................................................................... 292.2 Innovation infrastructure ................................................................................................... 352.3 Legal framework for scientific research ............................................................................ 382.4 Current state of STI policy................................................................................................. 402.5 Innovation in the economic programmes of the government ............................................ 432.6 Key instruments for innovation ......................................................................................... 462.7 Conclusions........................................................................................................................ 51

CHAPTER 3 EDUCATION AND RESEARCH ....................................................................... 533.1 Education and human capital ............................................................................................. 533.2 Research and innovation .................................................................................................... 643.3 Kosovo Research institution survey .................................................................................. 653.4 Conclusions........................................................................................................................ 69

CHAPTER 4 INNOVATION IN THE BUSINESS SECTOR .................................................. 714.1 Business associations and business support organisations ................................................ 714.2 Kosovo Business Survey Results ....................................................................................... 734.4 Conclusions........................................................................................................................ 84

RECOMMENDATIONS AND NEXT STEPS .......................................................................... 87BIBLIOGRAPHY ....................................................................................................................... 93ANNEX 1 .................................................................................................................................. 101ANNEX 2 .................................................................................................................................. 105Tables

Table 1.1. Main macroeconomic indicators of Kosovo (2008-2011) ...................................... 15Table 2.1 Councils for education, science and technology in Kosovo .................................... 32Table 2.2 Overview of business support centres in Kosovo .................................................... 36Table 2.3 IPA funding in Kosovo (2007-2013) ....................................................................... 48Table 2.4 USAID programmes related to innovation development in Kosovo ....................... 51Table 3.1 Most relevant measures supporting innovation ....................................................... 68Table A.1 SWOT analysis for the innovation system in Kosovo .......................................... 101


8/113

6

Table A.2 Regional Development Agencies in Kosovo ........................................................ 102Table A.3 Policy measures for scientific research funding in Kosovo .................................. 103

Figures

Figure 1.1. Real GDP growth rate in Kosovo, 2006-2011 ....................................................... 17Figure 1.2. GDP per capita in Kosovo, 2006-2011 ................................................................. 17Figure 1.3. GDP in the Western Balkans in 2011 .................................................................... 18Figure 1.4. Inflation rate in Kosovo (2006-2011) .................................................................... 19Figure 1.5. Unemployment rate and youth unemployment ..................................................... 20Figure 1.6. Flow of goods on external trade 2006-2011 .......................................................... 21Figure 1.7. Export and Import rate of goods and services ....................................................... 21Figure 1.8. Exports by destination (2012) ............................................................................... 22Figure 1.9. FDI in the Western Balkans .................................................................................. 23Figure 1.10. Net foreign direct investment .............................................................................. 23

Figure 1.11. FDI inflows (2007-08) ......................................................................................... 24Figure 1.12. Doing Business Ranking, Kosovo 2013 .............................................................. 25Figure 2.1 Institutional departments relevant to innovation in Kosovo ................................... 31Figure 2.2 Gross Expenditure on R&D ................................................................................... 40Figure 3.2 Number of students enrolled at the University of Pristina in 2010/2011 ............... 58Figure 3.3 Number of students at the University of Prizren in 2010/2011 per field of study.. 59Figure 3.4 Employment rate by level of education .................................................................. 61Figure 3.5 Unemployment rate by age group .......................................................................... 61Figure 3.6 Employment rate by gender ................................................................................... 62Figure 3.7 Average salary by level of academic qualification (in euros) ................................ 62Figure 3.8 Yearly budget to implement the National Research Programme until 2019 .......... 65Figure 4.1 Types of innovation ................................................................................................ 74Figure 4.2 Estimated impact on profit ..................................................................................... 75Figure 4.3 External sources of financial support for innovation ............................................. 75Figure 4.4 Annual expenditures for acquisition of external knowledge .................................. 76Figure 4.5 How innovation opportunities are identified .......................................................... 76Figure 4.6 Motivating factors for innovating ........................................................................... 77Figure 4.7 Most useful types of innovation ............................................................................. 77Figure 4.8 Chosen areas for external assistance ...................................................................... 78Figure 4.9 Main barriers to innovation .................................................................................... 78Figure 4.10 Estimated employee education level .................................................................... 79Figure 4.11 Impact of brain drain ............................................................................................ 80Figure 4.12 Collaboration partners .......................................................................................... 81Figure 4.13 Nature of the links with domestic universities ..................................................... 81Figure 4.14 Main sources of intellectual ................................................................................. 82Figure 4.15 Institutions that companies would like to collaborate with .................................. 82Figure 4.16 Most relevant measures for private sector innovation .......................................... 84Figure B.1 Regional distribution of surveyed companies ...................................................... 106Figure B.2 Detailed sector breakdown .................................................................................. 107Figure B.3 Turnover in 2011 ................................................................................................. 107Figure B.4 Exporters per sector ............................................................................................. 108Figure B.5 Export as a percentage of total sales .................................................................... 109


9/113

7

Boxes

Box 2.1 Top Class Programme, Kosovo .................................................................................. 34Box 2.2 Drenas Business Park ................................................................................................. 37Box 3.1 How does human capital spur innovation? ................................................................ 54Box 3.2 South East Europe 2020 Vision ................................................................................. 55Box 3.3 Internship programmes in Kosovo ............................................................................. 63Box 4.1 Measures supporting innovation ................................................................................ 83


10/113

8

ABBREVIATIONS

ACC American Chamber of CommerceBAC Business Advisory CouncilBAS Business Advisory ServicesBEEPS Business Environment and Enterprise Performance SurveyBGG Brain Gain GrantBIC Business Innovation CentreBiH Bosnia and HerzegovinaBSCK Business Support Centre KosovoCBK Central Bank KosovoCEED Centre for Entrepreneurship and Executive DevelopmentCEFTA Central European Free Trade AgreementCIP Competitiveness and Innovation Framework ProgrammeCITT Centre for Innovation and Technology TransferCPI Consumer Price IndexCVET Council for Vocational Education and Training for KosovoDCA Development Credit AuthorityDST Department for Science and Technology (MEST)EAR European Agency for Reconstruction

EBRD European Bank for Reconstruction and DevelopmentEC European CommissionECTS European Credit Transfer and Accumulation SystemEHEA European Higher Education AreaEIP EU Entrepreneurship and Innovation ProgrammeENQA European Association for Quality Assurance in Higher EducationERA European Research AreaEU European UnionFDI Foreign Direct InvestmentFINCA Foundation for International Community AssistanceFP7 Seventh Framework ProgrammeGERD Government Expenditure on R&D

GIZ Deutsche Gesellschaft fr Internationale ZusammenarbeitGDP Gross Domestic ProductICT Information and communication technologyICK Innovation Centre of KosovoICTPSP Information and Communications Technology Policy Support ProgrammeIDA International Development AssociationIDEP Institutional Development for Education ProjectIFC International Finance CooperationIMF International Monetary FundIPAK Investment Promotion Agency of KosovoIPO Industrial Property OfficeIPR Intellectual Property Rights


11/113

9

ISO International Organisation for StandardisationIT Information technologyKAA Kosovo Accreditation AgencyKAS Kosovo Agency of StatisticsKBA Kosovo Business AllianceKCC Kosovo Chamber of CommerceKIKT Kosovo Interdisciplinary Knowledge Triangle CentreKYSAP Kosovo Youth Strategy and Action PlanK-CIRT Kosovo Centre for International Higher Education, Research and Technology

CooperationLHE Law on Higher EducationLFS Labour Force SurveyMED Ministry of Economic DevelopmentMEST Ministry of Education, Science and Technology (Kosovo)MFIS Microfinance institutions

MTI Ministry of Trade and Industry (Kosovo)NEDC National Economic Development Council (Kosovo)NRC National Research Council (Kosovo)NRP National Research Programme (Kosovo)OECD Organisation for Economic Cooperation and DevelopmentR&D Research and developmentRCI Regional Competitiveness InitiativeRDA Regional Development AgencyREA Pristina Regional Enterprise AgencyRTD Research and technological developmentSAA Stabilisation and Association AgreementSEAF Small Enterprise Assistance Fund

SEE South East EuropeSKYL Supporting Kosovos Young Leaders Youth ProgrammeSME Small and medium-sized enterprisesSMESA SME Support Agency (Kosovo)SPS Sanitary and phytosanitary standardsSTI Science, technology, and innovationSTIKK Kosovo Association of Information and Communication TechnologyTAM TurnAround ManagementTIT Telecommunication Information TechnologyUNESCO United Nations Educational, Scientific and Cultural OrganizationUNMIK United Nations Interim Administration Mission in KosovoUSAID United States Agency for International DevelopmentUSD United States DollarsVET Vocational education trainingWTO World Trade Organization


12/113

10


13/113

11

EXECUTIVE SUMMARY

This report reviews the performance of Kosovos innovation system and will be used to guide thedevelopment of an innovation strategy for the period 2013-2020. The government sees innovation ashaving an important role in Kosovos economic and social development. In this regard, the OECDInvestment Compact for South East Europe (OECD IC) has been asked to provide assistance with thedevelopment of a first ever innovation strategy. The report was produced using a variety of sourcesincluding desk research, surveys of businesses, universities and research institutions as well asinterviews and consultations with stakeholders in public administration, industry, research communityand international organisations present in Kosovo.

The report is divided into four sections: 1) general economic performance and frameworkconditions; 2) institutional framework for innovation; 3) education and research; and 4) innovation inthe business sector. The report concludes with recommendations on how a future innovation strategymight be developed.

An innovation strategy for Kosovo will need to find a balance between building upon specificeconomic strengths and addressing persistent challenges. A notable strength is Kosovos economic

performance in the face of a global economic crisis. Average real GDP growth in Kosovo between2006 and 2011 amounted to 5.2%, while GDPper capita rose by 25% over the same period. The latteris tempered by the fact GDPper capita remains three times lower than the average for the South EastEurope (SEE) region. Nonetheless, the positive economic performance has been accompanied byefforts to improve the business climate. These efforts are reflected in Kosovos ranking in the WorldBanks Doing Business report. In the most recent issue for 2013, Kosovo improved by 19 places from117th out of 183 economies in 2012 to 98 th out of 185 economies. Efforts to improve the businessclimate are also reflected in the development of new institutions and legal frameworks. A newlyestablished National Economic Development Council (NEDC), a consultative body to co-ordinate

policy elaboration and implementation, aims to facilitate public-private dialogue on economicdevelopment issues. Alongside business climate improvements, innovation is increasingly receivingattention by policy makers. A new National Research Programme to orient science, technology, andinnovation policy has been passed while a draft Law on Scientific Research, Innovation andTechnology that aims to provide a clearer legal framework around public financial support forinnovation is in discussion.

At the firm level, data on the innovation performance of Kosovos companies is sparse. Insurveys conducted for this report, the findings show that innovation in businesses tends to be driven byexternal competitive pressures and customer requirements. Many firms face financial obstacles toinnovating while a small number manage to do so in spite of the obstacles. For both firms that claim toinnovate and those that cite constraints, a significant opportunity is seen in establishing deeperlinkages with large diaspora communities abroad. These linkages with business leaders andresearchers in the diaspora are viewed as a potential conduit for channelling new transfers ofknowledge and ideas to Kosovos innovation system.

The network of business support organisations and local business associations have an importantreinforcing role in the development of the innovation system. The primary contribution of these


14/113

12

organisations is to: facilitate entrepreneurship and business development; promote the interests of thebusiness sector in Kosovo; provide training opportunities; and expand commercial networks withinand outside of Kosovo. The issue confronting these organisations is that they themselves are new andrequire increased capacity building support to meet the expectations of their members. In addition, thecomplementary role of research institutions and their contributions to the innovation system meritsattention. This report finds that the capacity of universities and institutes is under pressure asevidenced by low numbers of staff dedicated to research. This will limit the ability of universities andinstitutes to perform more applied research in support of Kosovos economic development.

Kosovos most daunting economic challenge, however, is its unemployment rate of 45 %, thehighest in the SEE region. This is exacerbated by nearly 25-35,000 young individuals entering thelabour market each year with only a small portion of graduates finding employment; resulting in youthunemployment estimated to be the highest in Europe at near 73%. The threats to the innovation systemare three-fold: first, is that the best and brightest leave Kosovo altogether; second, that the skills of

previous graduates become obsolete as a result of not being used; and, third, the education system is

not producing graduates with the skills needed by the private sector. The latter point, in particular, canbe seen in selected sectors, such as in information and communication technology (ICT), where skillsgaps are present. One of the effects from such high unemployment levels is that remittances fromabroad, estimated to account for nearly 13% of GDP, are primarily used to finance householdconsumption. Reversing these trends will be difficult, but an important start will be improvingconsultation with the private sector to ensure secondary and tertiary education institutions aresensitised to the needs of the business community.

The international donor community has made significant contributions in Kosovo. Donor-financed activities and aid account for approximately 8.5% of Kosovos GDP. These resources presentan important opportunity for improving the innovation system by supporting capacity buildinginitiatives to enhance policy co-ordination and data collection for policy design. Regarding the former,

capacity building is needed to improve whole-of-government collaboration and consultation withstakeholders. With respect to the latter, the absence of basic innovation-related data constrains thedevelopment of meaningful analysis and policy responses. For example, data collection on basicindicators on commercialisation and human resources dedicated to R&D were difficult to obtain, if atall for this study. The ability of newly established institutions and programmes to improve theinnovation system will depend on component staff and accurate data.

Next steps and way forward

The issues identified in this background report support the need for an innovation strategy inKosovo. On the basis of the reports findings, the strategic pillars of the innovation strategy could be

based on the following:

Establishing inter-ministerial co-ordination, design and implementation of innovation policies.This pillar would aim to raise the capacity of government to elaborate, implement, monitor, andevaluate its innovation policies and measures. An emphasis would be placed on actions to promoteinter-institutional dialogue and public consultation on innovation. A concrete action under this pillarwould be to have innovation appear as a regular discussion point on the agenda of cabinet levelmeetings of ministers, in particular those meetings where the ministry of education and science,ministry of trade and industry, and the ministry of economic development are present. This could bedone by integrating innovation as a fixed component to the agenda of theNEDC.

Building stronger and market relevant research institutions. This pillar would centre on raisingthe capacity of research institutions to perform greater market-oriented and applied research. This


15/113

13

could focus on stimulating applied research and services for improving SME productivity. One optionwould be to examine how triple helix-like partnerships between SMEs, researchers and governmentcould be encouraged in Kosovo. Triple helix partnerships involve co-operation between academia,

business and local government in innovation projects. It advocates the notion that value creation ininnovation is accelerated when the actions of these three stakeholders are coordinated. Other measurescould include facilitating greater collaboration between domestic R&D institutions and theinternational research community as well as encouraging sabbatical leaves of the Diaspora in Kosovoinstitutions.

Enhancing the business sectors propensity to innovate. This third pillar would focus onstimulating greater business sector innovation through measures fostering greater science-industrynetworks and partnerships. Actions under this pillar would involve promoting the benefits ofinnovation to SMEs and dispelling views that innovation only involves radical technologicaldevelopment. While other measures might include industry extension services, vouchers, and creditguarantee schemes. An additional action could support SMEs to access off-the-shelf technologies via

assistance with patent searches.

Aligning human resources and skills development with labour market needs. This fourth pillarwould focus on human capital development in higher education institutions and vocational andeducational training schools. The emphasis in this pillar would be on actions to engage greater privatesector involvement in programme design, with a view to raising the skill sets of recent graduates inline with labour market needs. Other actions could include developing a framework that facilitateslifelong learning. The framework would provide opportunities and incentives for adults to be retrainedin order to raise their employability.


16/113

14


17/113

15

CHAPTER 1

ECONOMIC PERFORMANCE AND FRAMEWORK CONDITIONS

Both economic theory and empirical studies suggest that innovation is a key driver ofproductivity and economic growth (Schumpeter, 1939; OECD, 2010a). Innovation needs a businessenvironment which is conducive to long-term investment in new activities (OECD, 2011). Thedevelopment of an innovation policy thus forms a significant building block of any governmentseconomic strategy (OECD, 2010a). In the European Union (EU), this can be seen in the developmentof the EU 2020 and the related Innovation Union strategies (Barroso, 2011). Focusing on innovationactivities and the development of an innovation policy is relevant for Kosovos economicdevelopment, as it would help domestic businesses increase their productivity, competitiveness andexport opportunities.

This chapter provides an overview of the economic performance and framework conditions inKosovo (see Table 1.1.). In order to better identify the broad challenges that Kosovos innovation

policy needs to address, it reviews recent economic developments in the economy, focusing onmacroeconomic data such as GDP growth, FDI flows, trade balance, and unemployment rates. Asstatistical data for Kosovo is scarce and often incomplete, the main data sources are the World BankGroup and the Kosovo Statistical Agency for the period 2006-2011.This chapter also evaluates theconditions for innovation in Kosovo, considering the business climate, access to finance, policies forinvestment, competition and trade, and intellectual property rights.

Table 1.1 Main macroeconomic indicators of Kosovo (2008-11)

2008 2009 2010 2011

GDP growth %, y-o-y 6.9 2.9 3.9 5.0

CPI inflation %, average 10.6 4.0 4.0 n/a

Government balance % of GDP n/a n/a n/a n/a

Current account balance % of GDP -15.3 -15.4 -17.4 -20.3

Net FDI EUR million 365 293 344 392

External debt % of GDP n/a n/a n/a n/a

Nominal GDP EUR billion 3.7 3.9 4.2 4.6

GDPper capita EUR 2 100 2 330 2 520 2 530

Source: data collected from World Bank (World Development Indicators), IMF (World Economic Outlook), Kosovo StatisticalAgency and Central Bank. CPI (consumer price index); FDI (foreign direct investment).


18/113

16

Despite the global financial crisis, Kosovos economy maintained macroeconomic stability,reflected in an average real GDP growth rate of 5.2% (2006-11). The economy is still highlydependent on inflows of remittances and donor activity (OECD, 2012a). Remittances from thediaspora are estimated to account for about 13% of GDP, and donor-financed activities and aidapproximately 11% (UNDP, 2009). Kosovos nominal GDP remains low compared with neighbouringeconomies. For example, the nominal GDP of the Former Yugoslav Republic of Macedonia with asimilar population is almost double that ofKosovos (EUR 7.4 billion vs. EUR 4.6 billion). A keychallenge for Kosovos economy is its labour market. It has the highest unemployment rate in Europe,consistently over 45%. More than 30% of the population lives below the poverty line, on less thanEUR 1.42 per day (European Commission, 2011). Exports account for only 10% of Kosovos totalexternal trade, a figure which underlines how uncompetitive most Kosovo businesses are. Privatesector innovation and increased competitiveness will be indispensable if companies are to satisfy localmarket needs, and this will also have a positive effect on export volume and job creation.

Kosovo is gradually developing the overall conditions and policies conducive to innovation. The

major policies and laws

1

to support its economic development are in place, but its weak administrativecapacity has hampered their implementation. In 2013, Kosovo was ranked 98th out of 185 economiesin the World BankDoing Business Index. Even though it has improved its ranking by 28 places since2012, crucial challenges remain for businesses dealing with construction permits, starting a businessand protecting investors rights. While the banking system has been developing since 1999, sources ofexternal finance for entrepreneurs remain scarce. The collateral requirements for small and medium-sized enterprises (SMEs) are prohibitive, with SMEs in Kosovo having to provide collateral of around200% of the loan amount.

1.1 Economic environment

1.1.1 Growth rate remained stable

The global financial crisis had only a small impact on Kosovos real economic growth due to itslimited financial and trade linkages with countries affected by the financial crisis (IMF, 2012). Theaverage real GDP growth in Kosovo between 2006 and 2011 was 5.2%, which exceeds the South EastEuropean (SEE) region2 average of 3.3% for the same period (World Bank, 2013). Real GDP growthslowed from about 7% in 2008 to about 3% in 2009, before recovering to 5% in 2011 (see Figure 1.1).In 2012, growth was projected to slow modestly to 3.8% according to the IMF, but still expected to berobust. This performance was mostly owed to a strong domestic demand largely due to remittancesand capital inflows that originate, from the Kosovo diaspora, located mainly in Germany, Switzerland,and the Nordic countries. However, the economy remains vulnerable to a possible deterioration inlabour markets conditions in these countries, which could trigger a drop in remittances and capitalinflows, with negative repercussions for growth, the fiscal position, and financial stability (IMF,

2012).


19/113

17

Figure 1.1 Real GDP growth rate in Kosovo (2006-11)

6.0 6.36.9

2.93.9

5.0

5.66.6

5.4

-1.8

1.72.4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2006 2007 2008 2009 2010 2011

GDP growth rate

(in %, 2006-11)

Kosovo SEE average

Source: World Bank (World Development Indicators)

GDPper capita in Kosovo increased by 25% between 2006 and 2011. However, it remains one-third of the average for South East Europe (see Figure 1.2). The growth of GDP per capita appears tohave been stimulated by increased public sector wages - which have risen more than 60% in the lastthree years, far surpassing productivity gains (EC, 2012). These increases in public sector wages are

part of an expansionary fiscal stance adopted in 2008 that also includes higher social spending. Theresulting deficits have been financed with donor support and by drawing down cash buffers, keeping

general government debt at low levels (IMF, 2012). The growth rate of both overall GDP and GDPper capita in Kosovo are comparable with the rest of SEE region, although other economies (such asCroatia and Serbia) were more strongly affected by the financial crisis.

Figure 1.2 GDP per capi tain Kosovo (2006-11)

2030 2010 2100 23302520 2530

7030 7080 73507660

8010 7990

0

2000

4000

6000

8000

10000

2006 2007 2008 2009 2010 2011

GDP per capita

(in euros, 2006-11)Kosovo SEE avera e



20/113

18

Despite economic recovery and recommenced growth, the level of GDP remains low at EUR 4.63billion in 2011 (IMF, 2011). Kosovo has the second lowest nominal GDP in the Western Balkans afterMontenegro, which has one-third of Kosovos population. A neighbouring economy with acomparable population size is the Former Yugoslav Republic of Macedonia, but its GDP is almosttwice that of Kosovo (see Figure 1.3).

Figure 1.3 GDP in the SEE region (2011)

Source: IMF statistics for 2011

It is estimated that the service sector makes up the largest part of Kosovos GDP (65%), followedby the industrial and agricultural sectors,3 which contribute 22% and 13% respectively. Thisbreakdown corresponds to the Western Balkans regional average.

1.1.2 I nf lation is volati le despite the usage of the euro

The official currency of Kosovo is the euro, but the Serbian dinar is also used in some areas ofnorthern Kosovo. Kosovos tie to the euro has helped keep core inflation low, which is reflected in theaverage inflation rate of 2.8% between 2003 and 2012 (see Figure 1.4). However, inflation reached an

all-time high of 14.2% in May 2008 and a record low of -4.4% in May of 2009 (Trading Economics,2012). Food prices were the main contributor to inflation, followed by energy-related items (EuropeanCommission, 2011).


21/113

19

Figure 1.4 Inflation rate in Kosovo (2006-11)

1.1.3 Unemployment r ate is the highest in SEE

With a rate of 45% Kosovo has the highest unemployment level in the SEE region. Unskilledworkers account for 60% of total registered job-seekers. The number of unemployed universitygraduates has steadily increased, although it remains relatively low. Data from the Kosovo Pensionand Savings Trust Fund indicate that in 2010 the number of contributors increased by 2.3%, almostequally divided between the government and non-government sectors (European Commission, 2011).

Overall, information about the labour market is scarce and doubts about its accuracy persist.

As in most economies in the SEE region (with the exception of the Former Yugoslav Republic ofMacedonia) the rate of youth unemployment4 exceeds the average unemployment rate. Youthunemployment in Kosovo is around 73%, above the SEE average (see Figure 1.5). The number of newlabour force entrants in Kosovo is significantly higher than other economies in the region. The level ofeconomic activity is insufficient to absorb the 30 000 young people entering the labour market eachyear (SMESA, 2012). Unemployment, particularly long-term unemployment, remains a criticalchallenge (OECD, 2010b).

The government recognises that high youth unemployment is a major constraint to social andeconomic development. Efforts to address this issue include the Kosovo Youth Strategy and ActionPlan 2010-2012 (KYSAP), which is intended to provide mechanisms for youth participation,education, employment, health care, and human security. In particular, its actions include enhancing

job-finding opportunities for youth and improving co-operation between institutions over their youthemployment policies. The Ministry of Labour and Social Welfare developed a Sectoral Strategy 2009-13 to increase the employment rate in Kosovo and establish an employment and vocational traininginfrastructure that corresponds to labour market demands. The impact of these strategies has not yet

been assessed.


22/113

20

Figure 1.5 Unemployment rate and youth unemployment in the SEE region (2009)

45

3224

17 149

73

22

4743

27 25

0

10

20

30

40

50

60

70

80

Kosovo Former

Yugoslav

Republic of

Macedonia

Bosnia and

Herzegovina

Serbia Albania Croatia

Unemployment rate

(in %, 2009 )

Unemployment rate (%) Youth unemployment (%)

Source: World databank for 2009, but data on Kosovos youth unemployment rate is taken from the EC, 2011 data on BiHsyouth unemployment rate is for 2008; no data available for Montenegro.

1.1.4 I nternational trade: a largely negative trade balance

As enterprises are under increasing pressure from global competition, firms need to innovate andenhance their productivity to adapt to market needs. In order to satisfy the growing internal andexternal consumer demand, the local private sector will need to respond by introducing moreinnovative and competitive products.

Kosovos imports significantly exceed its exports, resulting in a large trade deficit. Kosovo has anegative trade balance of EUR2.2 billion, which is equivalent to 50% of GDP (see Figure 1.6). In2011, exports of goods and services amounted to 20% of GDP, while imports accounted for 66%(World Bank, undated). Both exports and imports of goods and services have been rising since 2006(Statistical Agency of Kosovo, 2011).


23/113

21

Figure 1.6 Flow of goods in external trade in Kosovo (2006-11)

Source: Statistical Agency of Kosovo

The average level of imports of goods and services to Kosovo as a proportion of GDP iscomparable with the otherWestern Balkan economies. But Kosovos neighbours on average exporttwice as much as a proportion of GDP (see Figure 1.7).

Figure 1.7 Average export and import rate of Kosovo and the SEE region (2006-11)

16

57

34

60

0

10

20

30

40

50

60

70

Export of goods and services (% of

GDP)

Import of goods and services (% of

GDP)

Average export and import rate of goods and services

(% ,2006-11)

Kosovo SEE average


24/113

22


Kosovos main trading partners are the EU countries and Switzerland. They account for the

largest share of imports (almost 42% in 2012) and exports (almost 48% in 2012). Neighbouringeconomies of the SEE region5 represent 41.1% of imports. The main export destinations for Kosovoafter the EU and Switzerland are Albania and the Former Yugoslav Republic of Macedonia (seeFigure 1.8).

Figure 1.8 Exports by destination (2012)

Source: Statistical Agency of Kosovo

Slightly less than two-thirds of Kosovo's total exports are primary products such as raw materialsor goods with a low level of processing and relatively low value added such as base metals. Mineral

products represent the second largest category, with over 12% of total exports. Manufactured exportsmainly consist of machinery, plastic and leather. Imports are generally of a higher processing stage,either intermediate or consumer goods. In 2011, Kosovo's imports exceeded 2.1 billion, with anannual increase of almost 15%. Kosovo mainly imports mineral products (e.g., fuel and ceramic

products), followed by industrial goods, machinery and equipment, which represent about 11% of totalimports. Import of agricultural products (food and beverages, live animals and vegetables) amounts to

just over a fifth of all imports but less than 8% of all exports (mainly beverages, spirits and vinegar).The only sector, where Kosovo has a positive trade balance, is the service sector. The export ofservices represents approximately 10% of GDP, while imports account for approximately 7.5% of

GDP. The positive balance mainly reflects increased revenues from the communication and travelservices (European Commission, 2012).

1.1.5 Foreign direct investment

Foreign direct investment (FDI) is crucial for economic growth and development, in particular fora small economy that has not reached world technological standards. Following the onset of the globalfinancial crisis in 2008 and sharp contractions in FDI inflows in most Western Balkan economies, amodest recovery began in 2011 (see Figure 1.9). Kosovo witnessed a rise in FDI of EUR 311 millionin 2010, which is equivalent to 5.6% of GDP. This represented a 10% increase on 2009 (see Figure1.10).


25/113

23

Figure 1.9 FDI in the SEE region (2007-10)


Investment in Kosovo has mostly been in the financial services sector, which on average hasreceived 26% of the total FDI during 2007-10. In 2010, one-third of total investment went into realestate and construction, and one-fifth into financial services (European Commission, 2011). Themanufacturing sector has recently seen a considerable growth in FDI. During 2010 it received thehighest share of FDI at 22.5%, compared to only 6% of the total in 2008, when it was one of thelowest shares. However, this increase of FDI into the manufacturing sector is largely related to

privatisation rather than new green-field investments (KPMG, 2011).

Figure 1.10 Net foreign direct investment (2006-11)



26/113

24

The majority of FDI originates from the EU countries of Austria, followed by Germany (19% oftotal FDI for the period 2007-10) and Slovenia (14% of total FDI for the period 2007-10).

Figure 1.11 FDI inflows (2007-08)

Source: Central Bank of Kosovo

1.2 Framework conditions for innovation

1.2.1 Business climate has improved

A sound business environment is a prerequisite for strong innovation performance, as this favoursforeign investment, which can in turn stimulate innovation through a variety of channels such as R&Dinvestment. More generally, the quality of framework conditions is likely to have an impact on theeffectiveness of innovation policies (OECD, 2012b).

The OECDs Investment Reform Index 2010 (IRI 2010) which measures investment frameworkconditions for South East European economies, has found that Kosovo performs below the regional

average in most policy dimensions, particularly in the areas of investment policy and promotion,human capital development and trade policy (OECD, 2010b). The report calls for several policyreforms to improve the investment climate, such as improving vocational education and training to

better align with needs of employers. Likewise, IRI 2010 also raises the issue of inaccurate propertyand land registers.

The government has taken steps to improve the business climate in Kosovo and is reflected in thelatest Ease of Doing Business rankings produced by the World Bank. For instance, the economy hasstarted to close the gap with respect to the other SEE economies by improving its ranking in the 2013report (from 126th to 98th out of 185 economies world-wide). According to the Doing Business 2013,the most burdensome business procedure is obtaining a construction permit. It requires 156 days andcosts 2 986% of average income, compared to an OECD average of 78.7%. It should be noted,


27/113

25

however, that Kosovo performs better on this indicator than the SEE economies on average. Starting abusiness is a particularly lengthy and costly procedure, requiring 52 days and 23% of income percapita, and is more complicated than the average for the SEE region (World Bank/IFC, 2012).

Figure 1.12 Doing Business rankings Kosovo (2013)

SEE includes the EU pre-accession economies in South East Europe

Source: World Bank/IFC Doing Business 2013 report

TheDoing Business Index 2013 also shows that Kosovo performs above the regional average insome of the indicators. For instance, registering property is particularly inexpensive, costing 0.6% ofthe property value against 4.5% in OECD countries. Likewise, while there are more yearly tax

payments in Kosovo than in OECD countries, the number of hours required to pay taxes and the taxrates are lower in Kosovo. Finally, Kosovo performs best on the Getting Credit indicator,outperforming both Eastern Europe and Central Asia and the OECD average on the strength of thelegal rights index (8 in Kosovo against 7 in the OECD) and on the public registry coverage. However,it has no private credit bureau in place.

1.2.2 I nvestment poli cy and promotion

While increasing globalisation provides new opportunities, it also requires continuous adaption inorder keep up with increasing international competition. FDI can serve as a means of knowledgetransfer, embodied in imported technology or goods, and can therefore contribute to a countrysinnovation performance (OECD, 2012b). The Investment Promotion Agency of Kosovo (IPAK),under the Ministry of Trade and Industry, is responsible for attracting foreign investment in Kosovo.The Investment Strategy 2010-12 aims to strengthen the manufacturing, trading and services sectors

by attracting investors mainly from Europe, the Middle East and North Africa (IPAK, 2012).

Best ranking

Poorest ranking


28/113

26

Formal restrictions to public treatment are limited. Transfers of capital can be made freely andforeign investors may bring in specialist personnel to support their business operations. Today,restrictions are applied to the arms manufacturing sector (OECD, 2010b).

However, the lack of protection of physical property rights in Kosovo is a significant hurdle.Although the law permits foreign ownership and purchase of urban and rural land along with real

property, the accuracy of land title registers and cadastral maps continues to be questioned by theprivate sector and international organisations (OECD, 2010b).

1.2.3 Competi tion policy

Competition policy is closely related to innovation. High levels of competition in product marketscontributes to increased GDP per capita by stimulating the reallocation of resources towards more

productive activities (OECD 2012c). According to Aghion et al. (2005) competition may increase theincremental profits from innovating, and thereby encourage R&D investments. More competition may

foster innovation and growth because it may reduce a firms pre-innovation rents by more than itreduces its post-innovation rents. Firms thus seek to reduce the rents that could be captured by afollower who succeeds in catching up with its rival by innovating.

The Law on Protection of Competition defines the rules and measures for the protection of freeand effective competition in the market, and defines the competencies and organisation of theAuthority for Protection of Competition, as well as the procedures concerning the implementation ofthis law.6Kosovos competition law is now to a large extent compliant with EU standards, but stillneeds to be aligned further, for example the definition of a dominant market position. The turnoverthresholds for the obligation to notify planned mergers ought to be adjusted to a level appropriate tothe size of the Kosovo economy (European Commission, 2011).

The Authority for Protection of Competition has made decisions over breaches of competitionrules by companies active in the markets for retail motor fuel, fiscal cashiers and insurance; and hasimposed fines on certain companies in these sectors. The actual payment of fines is still subject to theoutcome of appeals by the companies. The Authority has not adopted any merger decisions and itcontinues to build up experience. The Authority suffers from a lack of experienced staff and still doesnot have its own premises (European Commission, 2011).

The Law on State Aid setsout rules and procedures to support economic and social developmentand implements principles that ensure the functioning of the market economy and protectcompetition.7

1.2.4 Barr iers to trade

Higher exports are closely linked to innovation. Exports are fostered by products which are bothinnovative and more competitive, or by lower priced products. In addition, innovative companies needlarger markets if they are to get a return on their R&D investments.

Kosovo is gradually integrating into the multilateral trading system. While Kosovo has not yetformally applied to become a World Trade Organization (WTO) member, it has started to prepare thenecessary documentation and to implement the institutional and legislative requirements. The EU hasgranted Kosovo autonomous trade measures and conducted a feasibility study for a Stabilisation andAssociation Agreement (SAA)8 between the European Union and Kosovo (European Commission,2012). The lack of progress in initiating negotiations for WTO membership and an SAA partiallyreflects Kosovos status issues. However, Kosovos institutional and policy setting is also not yet


29/113

27

ready for WTO membership or for implementing a free trade agreement with the EU. Thus, it shouldstrive to continue implementing the necessary reforms that would eventually allow it to fully integratewith the multilateral trading system (OECD, 2010b).

Since 2006, Kosovo has been a member of the Central Europe Free Trade Agreement (CEFTA)9with the intention of enhancing its integration into regional economic structures. Serbia and Bosniaand Herzegovina initially refused to recognise Kosovo's customs stamp or extend reduced tariff

privileges for Kosovo products under CEFTA, but both economies restarted trade with Kosovo in2011. However, impediments still occasionally occur at the border when exporting products toneighbouring economies. The average customs duties applied on capital goods in Kosovo aresignificantly higher than in the other Western Balkan economies.

Kosovo has made institutional and legislative reforms to counter the emergence of potentialtechnical barriers to trade. The Law on Accreditation established the Directorate for Accreditationwithin the Ministry of Trade and Industry.10 The Law on Technical Requirements for Products and

Conformity Assessment regulates the manner of prescribing the technical requirements for productsand the procedures of conformity assessment.11

Since 2006, Kosovo has set up agencies responsible for sanitary and phytosanitary standards(SPS) but they still have administrative limitations. In the area of trade facilitation, the licensingsystem is still in an early phase of implementation. (OECD, 2010b, 2012a).

1.2.5 Access to f inance

Access to finance is important to enable innovation and the growth of enterprises. In order toinnovate, companies need to be able to finance research and invest in new equipment. Nevertheless,

businesses, particularly start-ups, micro firms and SMEs, may find it difficult to obtain external

financing. They face barriers that include asymmetric information, insufficient collateral and a lack ofa credit track record (OECD, 2012d).

Although the banking system in Kosovo has been developing since 1999, entrepreneurs still findit difficult to access sources of external finance. This is due to conservative lending policies by banksand deficiencies in the information available on borrowers creditworthiness, such as a lack of properaccounting and audited financial statements.

The banking sector in Kosovo is dominated by foreign banks, which account for around 90% ofall banking assets. The microfinance sector in Kosovo has been operating since 1999. Mostmicrofinance institutions (MFIs) were established by international humanitarian organisations. Thereare 14 MFIs in Kosovo, operating mainly in rural areas, regulated by UNMIK Regulation 2008/28 and

the Central Bank of Kosovo (CBK).12

Microfinance provides 18% of individual loans by number, andtotals 7% of the value of all loans.

Public support for SMEs is provided through international donors. The United States Agency forInternational Development (USAID) has developed several programmes to improve SME access tofinance, including the Youth Entrepreneurship Programme and the Development Credit Authority(DCA). The DCA provides 50% risk guarantees to agribusiness projects. Funding to start-ups is also

provided by international organisations through programmes such as Start-up Pristina (OECD, 2012a).

Bank loans may not be the most appropriate source for companies undertaking new projects withpotential uncertain outcomes and longer payback periods. Equity finance can be a more relevant


30/113

28

financial source for innovation. This provides an incentive for shareholders to seek for a higher returnon equity, hence investing in R&D.

1.2.6 Intellectual property rights

The protection of intellectual property, such as patents and copyrights, is a pre-condition forinnovation in an economy. Intellectual property rights are designed to create incentives for R&Dinvestment by granting inventors exclusive rights to their innovations for a fixed period of time(Williams, 2010).

Kosovos laws on patents,13 trademarks14 and industrial design15 were amended in July 2011, withthe aim of making them compliant with EU legislation. A Trademark Database was established, but isnot yet functional. At the same time, the digitisation of data for over 10 000 applications was finalisedin May. In 2010, 1 480 decisions on trademarks and 147 on patents were taken. In 2010, the IndustrialProperty Office received 550 trademark applications, 85 patent applications and 4 applications on

industrial designs. The backlog of applications remains very high, with 17 000 trademarks 4 000designs and 500 patents outstanding. Procedures remain lengthy as the Industrial Property Office isstill understaffed and its premises are not adequate.

An Intellectual Property Rights Unit was established within the Kosovo Customs Office andbecame fully operational in January 2011. Risk profiles on goods that may infringe property rightswere drafted and awareness activities on intellectual property rights have increased. In general,Kosovo has started efforts to align its legislative framework with European standards, butcounterfeiting and piracy remain serious issues in Kosovo. For example, local suppliers of theautomotive sector acknowledged that protection of intellectual property rights should be furtherenhanced in order to encourage investment in research and development, innovation and technologytransfers (OECD, 2009). Punitive measures against industrial property rights infringements still need

to be clarified.


31/113

29

CHAPTER 2

INSTITUTIONAL FRAMEWORK FOR INNOVATION

This chapter examines the institutional and legal framework for innovation in Kosovo and its rolein economic development. Although still at an early stage, the innovation system is graduallymaturing, providing the groundwork for knowledge-based economic development. While the role ofinnovation in economic development has not yet been fully recognised in Kosovo, government and

business structures increasingly reflect the importance of innovation as one of the main pillars ofeconomic growth.

The Ministry of Education, Science and Technology (MEST) and the Ministry of Trade andIndustry (MTI) are the main institutions responsible for creating a policy framework and environmentconducive to innovation, while the Ministry of Economic Development is gradually increasing its rolein the innovation system. The network of responsible institutions also includes different governmentinstitutions in charge of policy design, implementation and advisory activities. Although significant

progress has been made in developing the institutional framework to support innovation, especially inrelation to policy advice, such as the establishment of the National Economic Development Council,there is still room for improvement. The primary priority must be improved capacity to overcome thesystem deficiencies which have been identified: lack of experienced personnel, the lack ofimplementation and monitoring mechanisms, as well as little available data. The areas of inter-institutional co-operation and policy design also need to be improved, especially in relation to publicdebate.

The innovation infrastructure in Kosovo generally lacks equipment and human resources forresearch and development (R&D), following years of neglect ofR&D activities in Kosovos highereducation system. Institutions have been created to support technology and innovation, mostlyoriented towards providing education and consultancy services to entrepreneurs. However, their

performance and the effects of their work remain unknown, due to the absence of performance reviewsand audits.

Government funding programmes for R&D in Kosovo are based on the National Research

Programme and have been implemented since 2010. A major obstacle for the successfulimplementation of supporting measures and programmes is the limited R&D budget, which makesefficient implementation and monitoring procedures even more important, thus ensuring the allocationof available resources to projects with the highest development potential.

2.1 Institutional setup

The two main pillars ofKosovos science, technology and innovation system are the Ministry ofEducation, Science, and Technology and the Ministry of Trade and Industry (WBC-INCO.NET,2011a); both are also responsible for different implementation bodies that focus on specific issues. Anincreasing role is also played by the Ministry of Economic Development.


32/113

30

As it stands, there are no bodies directly responsible for steering innovation policy. The creationof the National Economic Development Council indicates that such a body could play an increasinglyimportant role for the development of innovation policy in Kosovo, but the implementation of aninnovation policy is likely to remain under the jurisdiction of specific ministries.

The section below sets out the roles and responsibilities of these key institutions, with a particularfocus on their role in innovation.

2.1.1 Nati onal Economic Development Council

The National Economic Development Council (NEDC) is a forum responsible for the co-ordination of policy development and the implementation of reforms, with the goal of improving the

business and investment environment and achieving sustainable economic growth in Kosovo (OECD,2012). The NEDC is a advisory body for the government in the area of economic development issues.It ensures private-public dialogue between the government and business sector. It includes

representatives of eight ministries: Ministry of Economic Development, Ministry of Finance, Ministryof Infrastructure, Ministry of Agriculture, Ministry of Trade and Industry, Ministry of Education,Science and Technology, Ministry of Health, and the Ministry of Spatial Planning. The NEDC alsoincludes representatives of three major cross-sector business associations: the Chamber of Commerce,the Alliance of Businesses and the American Chamber of Commerce.

The NEDC held its first meeting in April 2012 and is currently focused on defining the prioritiesfor Kosovos economic development. Innovation has yet to be recognised as one of the strategicdevelopment goals in Kosovo, but innovation system stakeholders believe that the elaboration of aninnovation strategy should significantly contribute to raising awareness of the importance ofinnovation in the overall economic development process (OECD, 2012).

2.1.2 Min istry of Education, Science and Technology

The Ministry of Education, Science and Technology (MEST) is responsible for theformulation of the science, education and technology development strategy in Kosovo and,consequently, the development of the scientific research and higher education system and the

promotion of innovation and technological development.

Within the MEST, the Department for Science and Technology (DST) is responsible for thecreation of infrastructure, the institutional and financial foundation for development of science andresearch, and the promotion of technological development. The scope of the departments workincludes the co-ordination of science, government, and public bodies, and supporting co-operationrelationships in Kosovo and abroad. The DST is divided into the Division of Science and the Division

of Technology (see Figure 2.1). Although the DST has an important role within the overall science,technology and innovation (STI) system, it currently has only 4 employees instead of the planned 16(MEST, 2012a). It thus has limited capacity to develop and implement policy.Further efforts should

be invested to acquire the necessary experts and ensure the DST has the resources it needs to operateefficiently. Particular focus should be placed on the education of employees in policy design andimplementation, especially in implementing funding schemes and the design of transparent evaluation

procedures.

MEST is also directly responsible for financing research projects, but it is under severe budgetaryconstraints. As well as a lack of funding resources, the research project funding only started threeyears ago, suggesting the ministry still generally lacks experience in efficient funding procedures. In2011, MEST allocated EUR 200 000 for ten research projects in different fields, only two of which


33/113

31

had any relevance to the business sector.16 It should be noted, however, that the application processwas only open to universities and research institutions rather than individual enterprises. Clearly theresearch funding process is at an early stage of development and in need of refinement.

Kosovos R&D budget is low (EUR 1 million), compared to other countries in the region. Forexample, the R&D budget of the Croatian Ministry of Science, Education and Sports amounted toEUR 163.4 million in 2010 (World Bank). Kosovos low R&D budget means that programmes should

be continuously monitored in order to identify gaps in procedures and minimise the risks of providingfinancial resources to non-sustainable projects.

Figure 2.1 Institutional departments relevant to innovation in Kosovo

Figure 2.1.(National Research Programme, 2010) shows the structure of the departments withinthe Ministry of Education, Science and Technology as well as independent government agencies thatare relevant for innovation policy in Kosovo. Table 2.1 outlines the councils established to promote

and develop education, science and technology in Kosovo.


34/113

32

Table 2.1 Councils for education, science and technology in Kosovo

Council Members

State Council for Teacher Licensing 15 member expert group

State Council for Curricula and Textbooks Ad hoc expert council

State Central Commission for Matura Supervisory, advisory and decision-making body

Council for Vocational Education and Training forKosovo (CVET)

15 representatives from the Government of Kosovoand social partners

MEST, together with these accompanying institutions, is gradually developing the framework forscience, technology and innovation development in Kosovo. The first strategic approach towardsdevelopment of research in the economy has been the adoption of National Research Programme (seeSection 2.5.1) by the National Research Council, which provides a sound base for future researchfunding and development. Other significant achievements include the establishment of the Division ofScience and Technology within MEST, and elaboration of the Draft Law on Scientific Research,Innovation and Technology, which are expected to contribute to developing an effective and

productive research and innovation system.

Designing and implementing an effective innovation system will need further capacity buildingand human capital development. The creation of a system for monitoring and evaluating funding

programmes should help ensure that funds are distributed to the projects with the highest potential.The implementation of funding programmes and other policy measures should be strictly separated

from government bodies responsible for policy design, so as to ensure transparency.2.1.3 Ministry of Trade and Industry

The Ministry of Trade and Industry (MTI) aims to promote domestic industry and overalleconomic growth. It consists of 11 departments, of which the Industry Department has the mostsignificant role in Kosovos science, technology and innovation system. The Industry Departmentswork includes co-ordinating industrial policy, ownership and privatisation, and the introduction ofstandards. Its Industrial Production Development Division is responsible for facilitating industrialdevelopment and assists in the preparation of the domestic development strategy for the industrialsector and provides measures and instruments to facilitate technology transfer and the application ofinnovation.

Other relevant MTI institutions include the Industrial Property Office, the Investment PromotionAgency of Kosovo and the SME Support Agency of Kosovo.

The Industrial Property Office (IPO) is responsible for protection of industrial property, (i.e.patents, trademarks, industrial design and geographical indication) in Kosovo.

The Investment Promotion Agency of Kosovo (IPAK), established in 2005, is the primarygovernment institution supporting foreign investment in Kosovo and providing export promotionservices. IPAK functions as a one-stop shop for all investors ranging from collection anddissemination of information to assistance during all investment phases (WBC-INCO.NET, 2011a). Its


35/113

33

activities include providing information on the general business environment and specific industries,as well as linking potential investors to brownfield and greenfield investment opportunities.

The SME Support Agency of Kosovo (SMESA) is an executive agency established in 2006 topromote SME development, including the promotion of entrepreneurship, improvement in the overallproductivity and competitiveness of SMEs, developing SMEs in more disadvantaged communities andamong under-represented groups, and advocating the interests of the SME sector in general. Theoverall objectives of SMESA are to implement the SME Development Strategy. It has a governmentmandate to substantially increase the contribution of SMEs to GDP and GDP growth and tosubstantially contribute towards reducing unemployment (WBC-INCO.NET, 2011a). SMESA has anextensive role to play in relation to innovation matters, as set out in the SME Strategy, especially twoof its strategic goals: promoting and developing an entrepreneurial culture (Strategic Goal 3), andstrengthening the domestic and international competitiveness of SMEs (Strategic Goal 4) (see Section2.6.3 for more details).

These institutions should place particular emphasis in the future on fostering co-operation withother institutions over innovation development, especially with the MEST and its accompanyinginstitutions. In addition they should consider providing assistance to entrepreneurs and researchersregarding intellectual property rights.

2.1.4 Min istry of Economic Development and other mi nistr ies

The Ministry of Economic Development (MED) implements policies to encourage economicgrowth, enable local business development, encourage economic co-operation to attract foreigninvestments, facilitate competitiveness, ensure sustainable development and/or utilisation of energyand mining resources, and to facilitate the development of the telecommunication and informationtechnology.

Other ministries included in the overall STI system in Kosovo include the Ministry of Finance,especially in the area of budgeting; the Ministry for Public Administration, especially in the area ofinformation and communication technology (ICT) development and the Ministry of Labour andSocial Welfare, especially in the area of employment and co-operation with MEST in labour marketdevelopment issues.

2.1.5 Agencies and other related insti tuti ons

There are also other organisations which provide special services, foster innovation and have apositive impact on innovative entrepreneurship (WBC-INCO.NET, 2011a).

The Kosovo Interdisciplinary Knowledge Triangle Centre (KIKT) is a result of the TEMPUSproject17 implemented during 2010-13. KIKT focuses on the link between higher education and theeconomy, and aims to support capacity building in research and innovation, as well as curriculumdevelopment. Its main goal is to improve capacity building and conditions for the development of

professional research capacities, PhD studies, and training programmes for medical and naturalsciences at the University of Pristina.

The Kosovo Centre for International Higher Education, Research and TechnologyCooperation (K-CIRT) was established in 2007 with the aim of encouraging the science and researchcommunity to participate in European research, development and innovation programmes andinitiatives.


36/113

34

The Centre for Innovation and Technology Transfer (CITT) was established in 2008 as anindependent government agency under MEST, with the aim of providing support to science-industryrelations in Kosovo. According to the Western Balkan report (WBC-INCO.NET, 2011b), theestablishment of the CITT filled an institutional gap in the area of technology and innovation centres.However, the CITT has a limited budget, which significantly decreases its ability to implement actual

projects.

Regional development agencies (RDAs) were founded in December 2008 as inter-municipalinstitutions to act as co-ordinators and drivers of development activities in their economic regions.Their main responsibilities include the elaboration of the Regional Economic Development Strategiesin co-operation with other partners, and providing support to potential applicants for EuropeanCommission-related grants. There are five RDAs in Kosovo, working with 35 municipalitiesthroughout Kosovo (see Annex A, Table A.4).

The Pristina Regional Enterprise Agency (REA) was established in 2001 as an initiative of the

European Agency for Reconstruction (EAR). The REA employs experienced trainers, advisers andconsultants who provide business training services and support to entrepreneurs, SMEs andgovernment institutions.

The Centre for Entrepreneurship and Executive Development (CEED) is part of aninternational network that operates in South East Europe with its founding partners USAID and theSmall Enterprise Assistance Fund (SEAF). CEED Kosovo provides young entrepreneurs with know-how techniques and networks in order to grow their businesses faster (WBC-INCO.NET, 2011a). Italso provides practical training, consultancy, mentorship programmes and networking activities.

Box 2.1 Top Class Programme, Kosovo

The Top Class Programme is designed for young entrepreneurs and managers and consists ofthree main activities: ten networking learning workshops, local and regional business-to-business (B2B)meetings with different enterprises, and mentorship where beneficiaries/participants have an opportunityto meet one-to-one with experienced entrepreneurs and experts from different fields and sectors. Otherprogrammes include Top Class Plus focused on soft skills, Top Class Finance providing basic financialeducation to young entrepreneurs, and Managerial Club, fostering networking of businesses. CEED isalso active in the implementation of EU-funded projects, such as Business Support and Learning forGrowth, which aims to foster economic growth and increase job creation in several Kosovomunicipalities.

Source:http://www.ceed-kosovo.org/web/ProgramSites/TopClass/Pages/Program/default.aspx
http://www.ceed-kosovo.org/web/ProgramSites/TopClass/Pages/Program/default.aspxhttp://www.ceed-kosovo.org/web/ProgramSites/TopClass/Pages/Program/default.aspxhttp://www.ceed-kosovo.org/web/ProgramSites/TopClass/Pages/Program/default.aspxhttp://www.ceed-kosovo.org/web/ProgramSites/TopClass/Pages/Program/default.aspx


37/113

35

The IPKO Foundation provides scholarships to university students in Kosovo who are pursuinga field of study with a digital focus. Targeted recipients might include economics students working onthe potential of the IT field for economic development, law students focused on intellectual propertyrights and graphic design students working with digital media.

This network of agencies and institutions providing support to innovation activities has beenincreasing over the last few years and is expected to play a major role in overall economicdevelopment in Kosovo. Further measures should be aimed at ensuring these institutions havesustainable funding and investing in the education of their employees.

2.2 Innovation infrastructure

Besides the basic research infrastructure, which is currently provided mostly within universitiesand research institutes (see Chapter 3), the development of innovation requires an overall approachcombining the support of both businesses and research infrastructures. In Kosovo, the overall

innovation infrastructure requires significant improvement and capacity building. A network ofdifferent public and private sector institutions is gradually developing to provide basic infrastructurefor conducting and promoting science, technology and innovation activities. This network consists ofseveral institutions that can be grouped in three main categories: 1) business support centres andtechnology / innovation centres, 2) economic zones, and 3) clusters, each of which is detailed below.

2.2.1 Business support centres and technology / innovation centr es

Overall, the number of institutions supporting business, technology and innovation has grownover recent years, widening the range of support available to new and existing entrepreneursthroughout Kosovo (see Table 2.2). However, the performance of these centres and their effect on the

business environment remains unknown, due to the general absence of performance reviews and

audits. Kosovo needs to develop an evaluation culture, and this should be emphasised as a governmentpriority by the Ministry of Trade and Industry, Ministry of Education, Science and Technology andaccompanying institutions and agencies.


38/113

36

Table 2.2 Overview of business support centres in Kosovo

Centre Principal activities

The Business Advisory Centre (BAC) MitrovicaNorth

Education and services to companies such as businesstraining programmes, consultancy services, business

registration support, micro-credit, logistics support, provision ofoffice space and capacity building.

Business Advisory Centre (BAC) MitrovicaSouth

Services to entrepreneurs free of charge, includingeducational training, business registration, consultancy, micro-

credit designed for start-up companies and networkingservices.

Business Advisory Centre (BAC) ZvecanConsultancy and advisory services, start-up loans andtraining, aimed at new graduates, entrepreneurs and

unemployed persons wishing to start their own business.

Business Support Centre Kosovo (BSCK)

Support to unemployed youth, graduate students and youngstart-ups in establishing their companies, offering practical

training courses, consultancy services and access to micro-loans.

Genesis Technology Centre

Practical training in electronics and manufacturing, appliedtechnology research and technology business incubation. The

centre currently operates as a training institute but aims towiden its business activities with business incubation services

in the future.

Kosovo Association of Information andCommunications Technology (STIKK)

Improving standards and educational opportunities andrepresenting its members vis--vis the government. Ensuringthe creation of new business opportunities and investments

within the ICT sector.

Innovation Centre Kosovo (ICK)

Incubator services, mentoring, consulting and training toentrepreneurs and managers in business planning,

accounting, finance, product/service development, marketing/sales, human resources, technology development and transfer

and matchmaking with local, regional and internationalbusinesses.

Innovation Lab Kosovo

Support youth to transform innovative ideas into actionableprojects and implement them. The Design Center of the

Innovation Lab directly designs and implements technologicalinnovations for Kosovo institutions that work on behalf of

children and young people.


39/113

37

2.2.2 Economic zones

In order to provide a policy framework to support the further development of business andeconomic zones in Kosovo, in 2009 the government introduced the Law on Economic Zones. 18 Thislaw governs the establishment, supervision and development of economic zones, and the rights andobligations of developers, management operators, and users operating within the zones. In accordancewith the law, MTI makes decisions on the establishment of economic zones, based on studies prepared

by the SME Support Agency and local/regional studies, in accordance with the economic developmentstrategy of the economy. The government declares economic zones based on proposals by MTI.

In 2011, the Programme for Managing Economic Zones in Kosovo (Government of Kosovo,2011a) was introduced. It is based on international best practice and recommends models (publiccompany or private companies) for the establishment of companies managing the economic zones inKosovo.

Box 2.2 Drenas Business Park

A key economic zone is within the Drenas Business Park, a joint project of MTI and Drenas (Gllogoc /Glogovac) Municipal Assembly. Drenas BusinessPark was established to create a physical environment for SMEdevelopment in order to better attract foreign direct investment and foster industrial development. DrenasBusiness Park is operating at almost full capacity and plans are being prepared for its expansion. Currently, thereare 33 companies in the Drenas Business Park, chosen from more than 80 applicants.

Besides the business spaces and accompanying infrastructure (gas, electricity, water, telephone, parkingspaces, etc.), businesspark tenants have access to services including legal support for company registration,comprehensive assistance during the start-up phase and support during construction and establishment of theworkspace as well as preferential access to local distribution, processed products and raw materials.

While these fairly standard services are likely to positively affect the efficiency of operations of companieslocated in the business park, they will not necessarily contribute to the realisation of innovative potential or valueadded. The creation of a business incubator, which could help jump-start innovation activity, is currently anobjective of the Drenas Business Park however uncertainty remains over its management and operation. In thiscontext, it should be noted that there are several other business incubator initiatives in Kosovo, includingShtime/Stimlje, Gjilan/Gnjilane and Dean/ Decani (OECD, 2012).

Several industrial parks and zones operate in Kosovo providing the basic infrastructure necessaryfor business development. The Industrial Park of Netherland Zinkunue Prizren currently operates inco-operation with a large company from the Netherlands. The Industrial Zone in Shiroke is the largestindustrial zone and currently has 30 companies distributed over 50 ha of land. Mitrovice/Kosovska

Mitrovica also has a small business park. There are several other projects that are currently beingdeveloped but not yet functional, including technology parks in Shtime / Stimlje and Sknderaj /Srbica, as well as Vushtrii Business Park and Lipjan Economic Zone.

Economic zones have the potential to play an important role in fostering innovation andincreasing the competitiveness of SMEs in Kosovo. However, getting them established requires acomprehensive strategic approach at a governmental level to foster a supportive environment forentrepreneurship and attract FDI. The Law on Economic Zones and the Programme for ManagingEconomic Zones in Kosovo represent progress towards that.

Further development should aim at designing subsidies and other policy measures that will offerincentives to entrepreneurs to relocate their businesses to economic zones, as well as encourage the


40/113

38

establishment of new companies within the zones. To optimise the advantages offered by economiczones, services provided within the zones should also be expanded and improved based oninternational best practices, as has been analysed in the Programme for Managing Economic Zones inKosovo.

2.2.3 Clusters

Clusters can be defined as a group of firms, related economic actors, and institutions that arelocated near each other and have reached a sufficient scale to develop specialised expertise, services,resources, suppliers and skills (EC, 2008, p.9). By encouraging the exchange of knowledge andcreating a concentrated pool of skilled labour, clusters serve as important drivers for competitivenessand innovation (EC, 2008).

The Fruit and Vegetable Cluster is currently the only operational cluster in Kosovo. It hasresulted, to some extent, in minor innovation in agriculture, which has led to enhanced productivity in

the value chain (WBC-INCO.NET, 2011a).Clusters are considered as an important development factor within government economic

programmes (see Section 2.6), and the establishment of new clusters with government support is to beexpected in the future.

2.3 Legal framework for scientific research

Kosovos framework regulating research activities is based on three main laws as follows:

The Law on Academy of Science and Arts of Kosovo, adopted in 2004.19

The Law on Scientific Research Activity,adopted in 2005.

20

The Law on Higher Education in Kosovo,adopted in 2011.21

The Law on Scientific Research Activity defines scientific research activity as a specific publicand domestic interest. The law also prescribes that up to 0.7% of the governments budget should beallocated for the purpose of fulfilling the n

assessment of the kosovo innovation system

Documents